China Targets Spur Speculation of More Credit Loosening

Pedestrians walk in front of a monitor showing coverage of Li Keqiang, China's premier, at the opening session of the National People's Congress (NPC) in the Causeway Bay district of Hong Kong. Photographer: Brent Lewin/Bloomberg

Analysts at Australia & New Zealand Banking Group Ltd. and
Nomura Holdings Inc. said authorities will need to loosen
monetary policy, after Premier Li Keqiang yesterday announced a
goal of 7.5 percent growth, the same target as last year. Li
said China will seek an “appropriate” increase in credit.

Any easing would contrast with leaders’ efforts to rein in
a $6 trillion shadow-banking industry and control the build-up
of local-government debt that followed stimulus measures
unleashed in 2008. Li is seeking to support growth amid three
money-market rate surges in eight months and the threat of
defaults of high-yield investment products and corporate bonds.

“I had hoped that they would pay more attention to curbing
the risks but instead they focused on growth,” said Dariusz
Kowalczyk, Hong Kong-based economist and strategist at Credit
Agricole SA. “They will just have to pay the price of higher
leverage and once they start to deal with this in earnest, the
costs of solving the issue will be bigger.”

The benchmark Shanghai Composite Index fell 0.9 percent
yesterday, the most in a week, amid concern that the country may
face its first onshore corporate bond default. Shanghai Chaori
Solar Energy Science & Technology Co. said it may not be able to
make an 89.8 million yuan ($14.7 million) interest payment in
full by the March 7 deadline.

Trust Bailout

The warning came little more than a month after the nation
averted its first trust default in at least a decade as
investors in a 3 billion-yuan high-yield product issued by China
Credit Trust Co. were bailed out days before it matured.

Shadow banking was rated as the biggest challenge for the
Chinese economy by more analysts than any other concern in a
Bloomberg News survey of 29 economists ahead of the National
People’s Congress meeting. The risk of vested interests blocking
efforts to increase the role of markets in the economy was the
next most-cited issue.

Economists also saw dangers from the property market; the
increased funding required to generate each unit of gross
domestic product; local government debt; and the threat that
liberalizing interest rates will trigger financial turbulence.

The combined debt of Chinese households, corporates,
financial institutions and the government rose to 226 percent of
GDP last year, up from 160 percent in 2007, Credit Agricole
estimated in a report last month. GDP reached $9.4 trillion in
2013.

Creating Money

“Given increasing credit risks, many would have expected
Mr. Li to talk about financial deleveraging of some sort,”
Kevin Lai, economist at Daiwa Capital Markets in Hong Kong,
wrote in a note. “There is still a desire to ensure enough
money is created to satisfy the refinancing pressure from many
borrowers.”

The economy expanded 7.7 percent in 2013, the same pace as
in 2012. Previous data this year have shown a slowdown in
manufacturing, while trade and credit expansion exceeded
estimates.

This year’s growth target is “flexible and guiding,” the
National Development and Reform Commission said in a related
report yesterday.

Li, who reiterated that China will pursue a “prudent”
monetary policy, announced a target of 13 percent growth in M2,
the government’s broadest measure of money supply. That was the
same target as last year, when M2 expanded 13.6 percent. The
budget deficit as a percentage of GDP will be about the same as
last year, Li said at the annual meeting of the legislature in
Beijing.

Leverage Pace

“If they are pursuing a trajectory to slow down the pace
of leverage they should target a slower M2 growth,” said Wang
Tao, chief China economist at UBS AG in Hong Kong, who
previously worked at the International Monetary Fund. “Without
doing that it’s not clear.”

People’s Bank of China Governor Zhou Xiaochuan may
elaborate on monetary policy during a press briefing that
normally is held during the legislature’s meeting, which ends
March 13.

China hasn’t adjusted benchmark interest rates since July
2012 and is in the process of removing controls on borrowing
costs and savings rates.

Currency Bets

The yuan slumped about 1.4 percent in February amid
speculation the PBOC wants an end to the currency’s steady
appreciation before a possible widening of the trading band. The
yuan climbed 0.24 percent yesterday, the most since 2012, on
anticipation the central bank has reached its goal of
discouraging one-way bets on the currency after spurring last
month’s record decline.

Zhou said recent foreign-exchange rate moves are
“normal,” the official Xinhua News Agency reported on its
microblog on March 4.

Not everyone saw a conflict between the growth target and
China’s vow to introduce more market-driven change. Stable
economic and labor-market conditions are “conducive for
actually implementing the top-down reforms,” Qu Hongbin, chief
China economist with HSBC Holdings Plc in Hong Kong, wrote in a
note yesterday. “Reform and growth should support each other.”